capsules and comments: briloff and the capital markets
DESCRIPTION
Capsules and Comments: Briloff and the Capital Markets. Elizabeth Edward Hassan Raza Rony Suthermaraj Geoffrey Smith. Intro. Abraham Briloff is a well-known accountant that is noted for being critical of the accounting methods of companies - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/1.jpg)
Capsules and Comments:Briloff and the Capital MarketsElizabeth EdwardHassan RazaRony SuthermarajGeoffrey Smith
![Page 2: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/2.jpg)
Intro•Abraham Briloff is a well-known
accountant that is noted for being critical of the accounting methods of companies
•Economist, George Foster , analyzed the effects that Abraham Briloff’s articles had on the capital market
![Page 3: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/3.jpg)
Intro•An average drop of 8% was noted in the
stocks of the companies he researched when his info was released to the public
•George Foster examines 5 reasons for why this occurs
![Page 4: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/4.jpg)
![Page 5: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/5.jpg)
Capital Market Model•Two criteria used for George Foster’s
examination of Briloff’s work:• -The day the article became “Publicly
Available” is obtainable• -The accounting practices of specific
companies must be criticized•Fifteen articles selected that included
security returns on 28 companies
![Page 6: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/6.jpg)
Capital Market Model•The article mentions that announcements
appear to have an effect on the capital market.
•This effect is concentrated within two day period around the announcements.
•Because of this Foster uses daily security returns in his analysis
•He examines the security returns thirty days prior to and after the publication of Briloff’s articles
![Page 7: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/7.jpg)
Capital Market Model•The capital market equilibrium model used to
describe the pricing of capital assets in the study is:
•(1) E(Rit) = E (Rat) + β i[E(Rmt) – E(Rat)] where
•Rit = return on asset i in period t•Rat = return on an asset whose returns are
uncorrelated with Rmt in period t•Rmt = return on the market portfolio in period t•β i = relative risk of asset i
![Page 8: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/8.jpg)
Capital Market Model•Using the previous model the effect of any
new information on asset i becoming available in period t can be determined as:
•(2) Uit = Rit – E(Rit│Rat, Rmt, βi) where•Uit = abnormal return•Abnormal Return calculated based on the
“companion portfolio” of Black and Scholes•Stocks are ranked on an estimate of beta in
period t-1 and placed into twenty portfolios
![Page 9: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/9.jpg)
Capital Market Model•The abnormal return on stock i in period t
is estimated using:
•(3) Uit = Rit - Rpt where
•Rpt = return on “companion portfolio” p in period t
![Page 10: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/10.jpg)
Cumulative Abnormal Return (C.A.R)What is it?-Sum of all the differences between the expected returns and the actual returns up to a given point in time
![Page 11: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/11.jpg)
Cumulative Abnormal Return (C.A.R)
Figure 1, shows the average cumulative abnormal return (CAR) of the 28 stocks
![Page 12: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/12.jpg)
Cumulative Abnormal Return (C.A.R)
Figure 2, shows The average cumulative abnormal return (CAR) of the 15 articles.
![Page 13: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/13.jpg)
Cumulative Abnormal Return (C.A.R)
Figure 3, is an overlap off the first two graphs to better display the affect Briloff’s articles had on the market. The blue line represents the CAR of Briloff's articles, and the red line depicts the CAR of the 28 stocks.
![Page 14: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/14.jpg)
Kolmogorov–Smirnov Test
![Page 15: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/15.jpg)
![Page 16: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/16.jpg)
5 Explanations1. The Capital Market is Inefficient2. Briloff Brings New Ideas to the Market3. Briloff’s Use of Non-public Info Sources4. Increased Government Regulation5. Uncontrollable Factors
![Page 17: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/17.jpg)
The Capital Market is Inefficient•If we assume that Briloff used information
that was “costless” and available to the public, then by definition of market efficiency there should be no price reaction to Briloff’s article
•Because the market was inefficient there was a price reaction to the article
![Page 18: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/18.jpg)
Briloff Brings New Ideas to the Market•Individuals can create their own analysis•This affects the ability to test the capital
market efficiently •When articles such as Briloff’s are released
one should predict the “appropriate” price reaction to such info releases
•Compare the predicted and actual results•Timing and magnitude of the info release
can play a large part in the “appropriate” price reaction
![Page 19: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/19.jpg)
Briloff’s Use of Non-public Info Sources•The data sources used by Briloff extend
beyond the information set “publicly available”
•Unfortunately there is no clear-cut distinction between “publicly available” and “non-publicly available” information sets
![Page 20: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/20.jpg)
Increased Government Regulation•Due to the effective way Briloff writes, he
acts as a catalyst to parties who can affect the future cash flows of firms
•Information on how the criticisms of a single individual influence the decisions of congressmen and bureaucrats are not easily available
![Page 21: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/21.jpg)
Uncontrollable Factors•There is always the possibility in any
experiment that uncontrolled factors may cause the results observed
•If the publication of each Briloff article coincides with the release of other information about the cited companies then ambiguity would exist over the cause of the results
![Page 22: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/22.jpg)
Questions•What were some of the financial analyses
that George Foster used to understand Briloff’s results?
![Page 23: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/23.jpg)
Questions•Explain market inefficiency?
![Page 24: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/24.jpg)
Questions•Which of the 5 explanations do you think
was the most influential to the changes in stock prices?
![Page 25: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/25.jpg)
5 Explanations1. The Capital Market is Inefficient2. Briloff Brings New Ideas to the Market3. Briloff’s Use of Non-public Info Sources4. Increased Government Regulation5. Uncontrollable Factors
![Page 26: Capsules and Comments: Briloff and the Capital Markets](https://reader035.vdocument.in/reader035/viewer/2022062812/56816286550346895dd2f66b/html5/thumbnails/26.jpg)
Conclusion•Timing of the price reaction is consistent
with an efficient market•When research goes beyond publically
available information it affects the tests of market efficiency
•Results are subject to varying interpretations